Colchester-based Titon (TON:130p), a small-cap designer and maker of domestic ventilation systems, and door and window hardware that has operations in South Korea, UK and Europe, has been hit by a more testing housing market in South Korea.
Indeed, new housing permits declined by 17 per cent in December 2018 compared with 12 months earlier. There has also been a move in the country towards the adoption of (more expensive) mechanical rather than natural ventilation units to deal with higher levels of air pollution. Titon’s 51 per cent-owned South Korean subsidiary, Titon Korea, is a maker of natural window ventilation products and has a 75 per cent share of the national market.
Titon has taken steps to redesign its existing natural ventilation products (including introducing ones with larger filters) and to introduce new products to adapt its offering to the market, but these are not expected to be available until later this year. As a result the company expects this year’s trading performance from South Korea to be “substantially below market forecasts”. Analyst Tony Williams at equity research firm Hardman & Co estimates that Titon’s underlying operating profit will decline by a third to £1.4m in 2019. However, the hit to post-tax profit is far less severe. Let me explain.
That’s because Titon’s share of operating profit from 49 per cent South Korean associate company BrownTech Sales, a distributor of ventilation products and a residential property developer in Seoul, should hold steady at around £800,000. Titon will also pay less corporation tax (£43,000 less than in 2018) and the minority share of net profit attributable to Titon Korea’s other shareholders will decline by £385,000. On this basis, Mr Williams estimates that net income attributable to Titon’s own shareholders is expected to be £1.78m, albeit that is 16 per cent lower than in 2018.
Based on 11.1m shares in issue, Titon should still make EPS of 16p (19.2p in 2018), which covers the annual dividend of 4.75p a share more than 3.3 times. I would also flag up that Titon has a rock solid balance sheet and a strong net funds position of £3.4m, a sum worth 31p a share. This means that the shares are priced on a cash-adjusted forward PE ratio of 6, and offer a dividend yield of 3.6 per cent. They also trade 21 per cent below book value.
Clearly, the trading news is disappointing, but it doesn’t warrant the savage mark down in the share price which, at 130p, is now below the 159p entry point in my 2018 Bargain Share portfolio. Admittedly, liquidity has accentuated the share price fall as the directors own 32.3 per cent of the share capital, including chairman and 8.8 per cent shareholder Keith Ritchie whom I interviewed prior to publishing this article. Three outside shareholders have a 25.4 per cent combined stake, too. That said, on any measure, the sell-off has gone too far. Moreover, once investors regain their poise, I expect Titon’s lowly rated shares to recover from the current depressed level. Buy.
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